Zynga’s IPO filing shows utter dependence on Facebook

Zynga has filed with the Securities and Exchange Commission to take the …

Zynga, creator of games like Farmville, Mafia Wars, and Words with Friends, has filed papers with the Securities and Exchange Commission in order to take the company public. The casual games giant hopes to raise $1 billion by selling stock. That may seem ambitious, but the filings note that the company enjoyed profits of over $392 million in 2010. The company shows no signs of slowing down, but the filing also reminds us just how much of Zynga's business is directly dependent on Facebook.

"Facebook is the primary distribution, marketing, promotion and payment platform for our games. We generate substantially all of our revenue and players through the Facebook platform and expect to continue to do so for the foreseeable future," the filing explains. "Any deterioration in our relationship with Facebook would harm our business and adversely affect the value of our Class A common stock."

It's a clear warning for investors: the company is in great shape when it comes to profits and growth, but it's closely tied to a volatile and fast moving property in social media. Nothing about the future is assured.

Zynga also notes that "[a] small percentage of our players account for nearly all of our revenue. We lose paying players in the ordinary course of business... we must attract new paying players or increase the amount our players pay," the filing states. In other words, Zynga could retain almost all of its current players and still see significant declines if its small paying customer base shifts.

With a broad array of games, Zynga looks more stable than it is, and the company discloses this weakness in the filing. "Historically we have depended on a small number of games for a majority of our revenue and we expect that this dependency will continue for the foreseeable future," the company said. "Our growth depends on our ability to consistently launch new games that achieve significant popularity. Each of our games requires significant engineering, marketing and other resources to develop, launch and sustain via regular upgrades and expansions, and such costs on average have increased."

The filing is an interesting look at the financial health of the company, with its 2,000 employees and rapid growth. But it's also a reminder of how dangerous it is to rely on a huge third party for your customer base; that company could exist fine without you... but you would be almost nothing without them.

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